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Fund IPO: Indexing benefits

Dhirendra Kumar

Indexing is about to make inroads for the domestic fund investors. Unit Trust of India has launched its version of S&P CNX Nifty tracker - Nifty Index Fund. The portfolio of the fund will be weighted in the same proportions as the components of the broad-based share index.

The performance of such a fund will mirror that of the S&P CNX Nifty index, thus ensuring that the fund does not perform worse (or better) than the market as a whole. Many investors, especially the believers of Efficient Market Theory, have reasons to favour index funds on the assumption that trying to beat the market averages over the long run is futile, and their investments in these funds will at least keep up with the market.

Unit Trust of India already has two existing Index funds, the India Index Fund, which tracks the NSE-50 (Nifty), but this fund is open only for overseas investors. The other, Master Index Fund (MIF) tracking the BSE Sensex, is available to domestic investors. The only other index fund tracking the 50 companies of the S&P CNX Nifty is IDBI Mutual Fund's IDBI Index I-Nit '99.

To achieve similar diversification in all Nifty stocks with ten shares each, it will cost Rs 4 lakh at current prices. Besides an index is made of liquid stocks, so index funds are thus more suitable for risk-averse investors.

UTI Nifty Index Fund is structured as an open-ended fund. The scheme will invest in the 50 companies of the S&P CNX Nifty in the same weightage as in this index. Investors can actually share in the gains made by the S&P CNX Nifty with a minimum investment of Rs 5000. The issue price will be Rs 10 without any initial expenses to investors.

IDBI Index I-Nit '99 is also working hard to get investors. It has dropped the 2 per cent entry load for investment from January 24, 2000. However, the fund will levy a maximum exit load of 1.10 per cent for redemption within six months. This fund also has a minimum investment of Rs 5000 and an investor can participate in a well-diversified low cost portfolio.

As these funds simply buy all the shares in a given index, they are often equated with robots and those offering it are often termed "black box managers". The managers program a computer to buy the required number of shares in the underlying stocks in the proportion of the index and allocate them to the fund.

Funds that track indices have relevance in some markets but not in all. The evidence is that the more mature the market, the more difficult it is to add value. In a mature market, information received by fund managers is largely the same for everybody. So without taking big sector or stock bets, most fund managers generally under-perform the index. Indian markets are fast gaining maturity, and beating the market is increasingly becoming difficult.

The launch of Index funds for domestic investors can well be a low cost way to get well-diversified stock market exposure. With the emergence of a wide set of professional fund managers, the time of index funds may just have arrived.

Benefits of Indexing

• A simple and effective way to get a diversified stock portfolio
• Low-cost fund management
• Assured of not being a laggard

The Index Compromise

• Forgo the opportunity to beat the market
• Poor performers in bear markets
• Some index funds may not necessarily mean diversification

Type: Open-ended
Price: Rs 10 per unit
Opens on: February 14, 2000
Closes on: February 26, 2000
Minimum subscription: Rs 5000, additional investments of Rs 1000.

Mutual Funds

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